Spending cuts: Child Trust Funds axed

The new Government has announced plans to scale back payments into Child Trust
Funds this year and axe them completely from the start of next year.

David Laws, the Chief Secretary to the Treasury, announced the changes as part of the coalition's plan to save more than £6bn from government spending this year. It is estimated that the abolition of CTFs will save £520m.

The first cuts to the tax-free savings plans will be made on August 1 this year. Any babies born after this date will receive just £50 from the Government to be paid into a CTF plan. Previously the vast majority of families received a £250 voucher.

Similar swingeing cuts will also be made to the higher payments given to families earning less than £16,190 a year. Rather than £500, these families will receive just a £100 voucher for babies born after August 1.

At the same time the Government will abolish all payments to seven-year-olds. Until now the Government had been making a further £250 payment into the child's trust fund at this age.

These reduced payments will be paid until the end of this year, when payments will cease altogether. Mr Laws said the Government intended to introduce primary legislation to stop all Child Trust Fund payments from January 1 2011. This would apply to lower-income families as well as those on higher salaries.

However, additional contributions for disabled children will be paid this year, although from 2011 the money used for these payments will be redirected to respite care.

Child Trust Funds were introduced in 2002 by the then Labour government. Since then some 5m children have received money into the savings plans. On receiving the voucher, the parent has the option of opening either a shares-based savings scheme or a cash account with one of the many approved CTF providers. Parents can "top up" these savings plans by up to £1,200 a year, tax-free.

Although the plans are now being scrapped, it is understood that existing Child Trust Funds will continue to run until the child's 18th birthday, when the plans mature. It is not yet clear whether parents will be able to continue making tax-free contributions into the funds after January next year.